01 Oct Learning From AQR's "A Century of Evidence on Trend-Following Investing"

For more than 80 years since 1903, Absolute Momentum strategy has delivered consistent and positive returns with low correlation to traditional asset classes each decade.

In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.

AQR’s research shows that Absolute Momentum has delivered consistent strong positive returns and low correlation to traditional asset classes for more than a century as shown in “Exhibit 1” in the paper (reproduced below). The positive returns and low correlation remains stable for each of the decade over the last century.

It is unlikely that such price trends are a product of statistical randomness or data mining. Trends appear to be a pervasive characteristic of speculative financial markets over the long term.

Source: AQR Capital Management

Apart from the low correlation with traditional asset classes, “Exhibit 2” in the paper (reproduced below) shows that Absolute Momentum strategy does well in extreme stock market events, both in strong bullish and bearish stock markets.

Source: AQR Capital Management

Taking the point further, “Exhibit 3” in the paper (reproduced below) shows that Absolute Momentum strategy experienced positive returns in 9 out of 10 of these stress periods and delivered significant positive returns during a number of these events.

Source: AQR Capital Management

Due to the diversifying effect of Absolute Momentum strategy, an allocation to the strategy would improve risk adjusted returns of a traditional portfolio as shown in “Exhibit 4” in the paper (reproduced below).

Source: AQR Capital Management

Lastly “Exhibit 5” in the paper below shows the 10 largest drawdowns of the strategy over the last century.

Source: AQR Capital Management

Research Paper: A Century of Evidence on Trend-Following Investing (Fall 2012)